Another method to deal with the unequal life problem of projects is the equivalent annual annuity (EAA) method. In this method the annual cashflows under the alternative investments are converted into a constant cash flow stream whose NPV is equivalent to the NPV of the comparativeproject's initial stream.Black Sheep Broadcasting is considering a three-year project that has a weighted average cost of capital of 12% and a net present value(NPV) of $49876. Black Sheep Broadcasting can replicate this project indefinitely.What is the equivalent annual annuity (EAA) for this project?$21,804$24,919$20,766$25,958An analyst will need to use the EAA approach to evaluate projects with unequal lives when the projects are

Equivalent Annual Annuity is also known EAA. It is a capital budgeting technique which helps in…

Answered: Another method to deal with the unequal…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $7,750 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions: Project B Project A Cash Flows Project A: $ Yes $ σ $ Project A Project B $ b. What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answers to the nearest cent. x X * $ CV BPC has decided to evaluate the riskier project at an 11% rate and the less risky project at a 10% rate. a. What is the expected value of the annual cash flows from each project? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A Project B X Net cash flow $ What is the coefficient of variation (CV)? (Hint: OB-$4,757.63 and CVB=$0.67.) Do not round intermediate calculations. Round a values to the nearest cent and CV values to two decimal…
Home & More is considering a project with cash flows of −$368,000, $133,500, −$35,600, $244,700, and $258,000 for Years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return (MIRR) if both the discount rate and the reinvestment rate are 14.6 percent? Why or why not?
Use the NPV method to determine whether Vargas Products should invest in the following projects: Project A costs $290,000 and offers seven annual net cash inflows of $65,000. Vargas Products requires an annual return of 16% on projects like A. Project B costs $375,000 and offers ten annual net cash inflows of $68,000. Vargas Products demands an annual return of 12% on investments of this nature. (Click the icon to view the present value annuity table.) (Click the icon to view the present value table.) (Click the icon to view the future value annuity table.) (Click the icon to view the future value table.) Requirement What is the NPV of each project? What is the maximum acceptable price to pay for each project? Calculate the NPV of each project. (Round your answers to the nearest whole dollar. Use parentheses or a minus sign for negative net present values.) The NPV of Project A is $ (27,465) . The NPV of Project B is $ 9,200 Now calculate the maximum acceptable price to pay for each…
Use the NPV method to determine whether Stenback Products should invest in the following projects: Project A: Costs $260,000 and offers eight annual net cash inflows of $54,000. Stenback Products requires an annual return of 14% on investments of this nature. Project B: Costs $395,000 and offers 10 annual net cash inflows of $77,000. Stenback Products demands an annual return of 12% on investments of this nature. (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) Read the requirements. Requirement 1. What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. (Enter any factor amounts to three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.) Caclulate the NPV (net present value) of each project. Begin by calculating the NPV of Project A Net Cash Inflow Project A: Years 1-8 0 Present value of annuity Investment Net present value…
Use the NPV method to determine whether Kyler Products should invest in the following projects: Project A: Costs $280,000 and offers seven annual net cash inflows of $52,000. Kyler Products requires an annual return of 12% on investments of this nature. Project B: Costs $385,000 and offers 9 annual net cash inflows of $75,000. Kyler Products demands an annual return of 10% on investments of this nature. (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) Read the requirements. Requirement 1. What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. (Enter any factor amounts to three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.) Caclulate the NPV (net present value) of each project. Begin by calculating the NPV of Project A. Project A: Years 1-7 0 Present value of annuity Investment Net present value of Project A Calculate…
Use the NPV method to determine whether Kyler Products should invest in the following projects: Project A: Costs $280,000 and offers seven annual net cash inflows of $52,000. Kyler Products requires an annual return of 12% on investments of this nature. Project B: Costs $385,000 and offers 9 annual net cash inflows of $75,000. Kyler Products demands an annual return of 10% on investments of this nature. (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) Read the requirements. Project B: Years 1-9 0 Project A Project B Present value of annuity Investment Net present value of Project B Requirement 2. What is the maximum acceptable price to pay for each project? Maximum Project A Project B Net Cash Inflow Acceptable Price Annuity PV Factor (i=10%, n=9) Requirement 3. What is the profitability index of each project? (Round to two decimal places, X.XX.) Select the formula, then enter the amounts to calculate the…
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial after-tax cash outflow of $6,500 and has an expected life of 3 years. Annual project after-tax cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Project B Probability Cash Flows Probability Cash Flows 0.2 $6,250 0.2 $ 0.6 6,500 0.6 6,500 0.2 6,750 0.2 19,000 BPC has decided to evaluate the riskier project at 11% and the less-risky project at 8%. a. What is each project's expected annual after-tax cash flow? Round your answers to the nearest cent. Project A: $ Project B: Project B's standard deviation (OB) is $6,185 and its coefficient of variation (CVB) is 0.80. What are the values of gg and CVA? Do not round intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places. OA: $ CVA:
Use the NPV method to determine whether Juda Products should invest in the following projects: • Project A costs $260,000 and offers seven annual net cash inflows of $63,000. Juda Products requires an annual return of 12% on projects like A. • Project B costs $380,000 and offers ten annual net cash inflows of S72,000. Juda Products demands an annual return of 14% on investments of this nature. (Click the icon to view the present value annuity table.) (Click the icon to view the present value table.) (Click the icon to view the future value annuity table.) (Click the icon to view the future value table.) Requirement What is the NPV of each project? What is the maximum acceptable price to pay for each project? Calculate the NPV of each project. (Round your answers to the nearest whole dollar. Use parentheses or a minus sign for negative net present values.) The NPV of Project A is -27532 The NPV of Project B is Now calculate the maximum acceptable price to pay for each project. (Round…
Better Health Inc. is evaluating two capital investments, each of which requires an up-front (time 0) expenditure of $1.5 million. The projects are expected to produce the following net cash inflows: Year Project A ($) Project B ($) 1 500,000 2,000,000 2 1,000,000 1,000,000 3 2,000,000 600,000 a. What is each project’s IRR? b. What is each project’s NPV if the opportunity cost of capital is 10 percent? 5 percent? 15 percent?
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $6,750 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Project B Probability Cash Flows Probability Cash Flows 0.2 $6,500 0.2 $0 0.6 $6,750 0.6 $6,750 0.2 $7,000 0.2 $19,000 BPC has decided to evaluate the riskier project at 12% and the less-risky project at 8%. What is each project's expected annual cash flow? Round your answers to two decimal places. Project A: $ Project B: $ Project B's standard deviation (σB) is $6,157.52 and its coefficient of variation (CVB) is 0.78. What are the values of (σA) and (CVA)? Round your answers to two decimal places. σA = $ CVA =
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $6,750 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Project B Probability Cash Flows Probability Cash Flows 0.2 $6,500 0.2 $0 0.6 $6,750 0.6 $6,750 0.2 $7,000 0.2 $19,000 BPC has decided to evaluate the riskier project at 11% and the less-risky project at 9%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet What is each project's expected annual cash flow? Round your answers to two decimal places. Project A: $ fill in the blank 2 Project B: $ fill in the blank 3
The management of NUBD Co. is considering three investment projects-W, X, and Y. Project W would require an investment of P21,000, Project X of P66,000, and Project Y of P95,000. The present value of the cash inflows would be P22,470 for Project W, P73,920 for Project X, and P98,800 for Project Y. Rank the projects according to the profitability index, from most profitable to least profitable. *

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